Kelly`s Criterion

The first one who answered that question was J.L. Kelly. He based his answer on a mathematical theory of information and its use in telecommunication. He invented a formula which allowed to calculate the optimum percentage of a given sum of money which should be allocated in further games. That percentage is defined by a formula:

In the above formula p is the probability of a success (the game has to be profitable- that is p>0.5), k-the rates- the net pay in case of a success in the game.

In the game Mr Smith vs Mr Brown- the optimum strategy for Mr Smith calculated from the Kelly`s formula assumes betting 4% of the stake money.

It allows to earn 122.6% of the starting money in 1000 rounds- that is $122.60 in Mr Smith case.

That strategy calculated from the formula only works if we have little predominance in the game, statistically. It can also be used while playing on the stock market. The predominance that we have, on our side, is proper economics knowledge.